When planning for retirement, many people often choose between a 401(k) or Roth IRA. Both offer tax advantages and long-term growth potential, but a Roth IRA may ultimately be a better choice for certain individuals. Here are some reasons, as per Tommy Shek, why a Roth IRA may be better than your 401(k).
Tommy Shek Lists Reasons Why a Roth IRA May Be Better Than Your 401(k)
Tax-Free Withdrawals
One of the most significant benefits of a Roth IRA is the ability to withdraw funds tax-free in retirement, says Tommy Shek. Unlike traditional IRAs or 401(k)s, Roth IRA contributions are made with after-tax dollars, meaning you won’t have to pay taxes on that money when you withdraw it in retirement. This can be particularly beneficial if you expect your tax rate to be higher in retirement than it is currently.
Flexible Contributions
401(k) contributions are limited by your employer and government regulations. On the other hand, Roth IRA contributions are much more flexible. You can contribute up to $6,000 a year ($7,000 if you’re over 50) as long as you earn income, and you can contribute at any age. This can make a Roth IRA a better option for those who want to save more of their income for retirement or who have irregular income streams.
No Required Minimum Distributions
Unlike 401(k)s, Roth IRAs don’t require you to take required minimum distributions (RMDs) at age 72. This means you can continue to grow your investment tax-free for as long as you want, and you won’t have to worry about distributions until after you pass away. This can be ideal for some retirees who have other sources of income and want to leave their Roth IRA as an inheritance for their beneficiaries.
No Early Withdrawal Penalties
Another advantage of Roth IRAs is that you can withdraw your contributions at any time without a penalty. While it’s not recommended to withdraw money from your Roth IRA before retirement, having the ability to do so is a valuable option. With a 401(k), you may be subject to a 10% early withdrawal penalty and taxes if you use the funds before you turn 59 1/2.
Tax Diversification
According to Tommy Shek, having a Roth IRA in addition to a traditional 401(k) or IRA can be a smart way to diversify your tax strategy in retirement. With a traditional 401(k) or IRA, you’ll pay taxes on your withdrawals in retirement, which could potentially put you in a higher tax bracket. By having a Roth IRA, you can withdraw tax-free funds in retirement without worrying about paying taxes on those withdrawals. This can be beneficial for those who have a mix of tax-deferred and tax-free accounts in retirement, allowing you to have more control over your tax liability.
Tommy Shek’s Concluding Thoughts
Overall, a Roth IRA may be a better choice than a 401(k) for some individuals, particularly those who expect to be in a higher tax bracket in retirement, want more flexibility in their contributions and withdrawals and value tax diversification. It’s important, as per Tommy Shek, to speak with a financial advisor to determine which retirement account option is best for your individual situation, but a Roth IRA is certainly worth considering.